New Say on Pay rule gives shareholders vote on CEO compensation

The Say on Pay rule approved by the SEC Wednesday lets shareholders decide if CEOs are worth their salary. Image: CC grittycitygirl/Flickr

Shareholders can now vote on the salaries of executives leading publicly traded companies. The “Say on Pay” provision of the Dodd-Frank financial reform bill was approved by the Federal Trade Commission on Wednesday. The Say on Pay vote is nonbinding, but analysts expect the rule may have a profound effect on the behavior and performance of chief executives.

Investors get a say on CEO pay

The Say on Pay rule was proposed as part of the Dodd-Frank Act passed in 2010 in response to executive compensation packages veering far out of line with company performance, as well as rank-and-file salaries. Starting with the first annual shareholders’ meeting conducted on or after Jan. 21, investors are allowed to vote on top-level salaries once every three years. Starting in January 2013 companies with outstanding stock worth $75 million or less will also be subject to the Say on Pay rule. The Say on Pay rule was approved by a 3-2 vote by the commission along partisan lines. Republican commissioners voted no, saying that smaller companies should be permanently exempt.

CEO pay careens out of control

The Say on Pay provision was included in the Dodd-Frank Act in response to public outrage about a chasm between executive and employee pay that has multiplied tenfold in the last few decades. Public policy groups participating in the debate on financial reform have said that the average CEO of a publicly traded company makes nearly 300 times the salary of the workers on the payroll. A generation ago, CEOs made more by a factor of 30. Corporate executives are free to ignore the vote, but it is likely they will avoid the embarrassment of investors openly expressing their negative opinions about them

A new era for U.S. public companies

The Say on Pay provision is also expected to give investors more influence with corporate executives on other issues. Under the rule companies are required to outline their response to shareholder votes in annual reports. If they choose to disregard the vote, they have to explain why. In the U.K., shareholders have had the right to hold companies accountable for years with an annual vote on executive pay. Many analysts expect the U.S. will evolve to resemble that system, wherein executive pay packages are negotiated in advance with shareholders before they are put to a vote.